Proposed topic: MACROECONOMIC DETERMINANTS OF OVERSEAS FILIPINO

WORKER’S (OFW) REMITTANCE

Prepared by: Jeanie Rose C. Quimno

Adviser: Ms. Jamila Allana B. Valdez

Objective of the Study

The main objective of the study is to determine the macroeconomic determinants

of Overseas Filipino Worker’s remittance in the Philippines. The particular objectives

included in the research study were:

 To estimates macroeconomic determinants of remittances in the Philippines.

 To examine which multi variables affect the remittances inflow in the Philippines.

Rationale

Philippine economy is strongly influenced by OFW remittances, according to

National Economic and Development Authority. They stated that the Philippine

economy can only become less dependent on it but it will never be completely

independent from it. This is because remittance is a huge factor source of foreign

currency for the nation as it is known that foreign currency is really helpful to a country’s

economy. Remittances from Overseas Filipino Workers are of great help to the

economy of the Philippines. Not only does it help in terms of GDP, it also provides

sufficient amount in funding government projects (Neri, 2013).

responsible for the variation in remittance inflows and to examine it empirically. Thus,

the purpose of this study is to contribute to the literature of OFW remittances and

intends to further understanding of this phenomenon.

Methodology

The study is designed to cover the important aspects of macroeconomic

determinants of Overseas Filipino Worker’s remittances in Philippines. Research aims

to analyze the extent relationship between the dependent variable and independent

variables. The research is casual and explanatory in nature and follows quantitative

research design. This study distinguishes empirically verified macroeconomic

determinants of OFW remittance by using multiple regressions. The data used for this

study comprises of secondary data. Sample size of 42 using annual data was used

spanning from 1990 to 2018 for determining the macroeconomic determinants of

Overseas Filipino Worker’s remittance. The quantitative substantiation of multiple

regression analysis shows that GDP and exchange rate appeared to be the important

macroeconomic determinants of OFW remittance and other macroeconomic

determinants of OFW remittance are inflation rate and interest rate. These data series

were obtained from the published sources, the concerned departments and other

relevant agencies which hold statistical information.

The study shall ponder on this economic model, where remittance inflow of OFW

is a function of the following identified variables:

Remittance inflow = f (exchange rate, inflation rate, interest rate, GDP)

Empirical Model

The model used in this study is a version of the following:

𝑹𝑬𝑴𝒕 = 𝑩𝟎 + 𝑩𝟏 𝑰𝑵𝑭𝑹𝒕 + 𝑩𝟐 𝑰𝑵𝑻𝑹𝒕 + 𝑩𝟑 𝑬𝑿𝑹𝒕 + 𝑩𝟒 𝑮𝑫𝑷 + 𝒆𝒕

Where:

b < 0; c > 0; d > 0; e > 0

taking log-linear form

(𝐥𝐧 𝑹𝑬𝑴) = 𝑩𝟎 + 𝑩𝟏 𝑰𝑵𝑭𝑹𝒕 + 𝑩𝟐 𝑰𝑵𝑻𝑹𝒕 + 𝑩𝟑 𝑬𝑿𝑹𝒕 + 𝑩𝟒 (𝑳𝒏𝑮𝑫𝑷) + 𝒆𝒕

REM Remittance inflow (in US dollar)

INF Domestic Inflation Rate

INTR Domestic Interest Rate

EXR Exchange Rate in Philippines (in Pesos per US dollar)

GDP Gross Domestic Product (in Million dollar)

Overseas Filipino Worker’s remittance may be influenced by different factors or

determinants. Here are some discussions of potential determinants.

Inflation rate

The inflation rate at the origin country is another macroeconomic determinant of

remittances. As high inflation affects the left‐behind family’s income level negatively,

remittances may increase because of the altruism motive. However; high inflation may

be interpreted as a signal of instability as well and therefore generates a decrease in

remittances (Glytsos, 1988; Elbadawi and Rocha, 1992; Aydaş et al., 2004). And high

rate of inflation in home country reduces the income which forces them to migrate and

therefore increases the remittances.

Exchange rate

The BSP has also conducted studies on the macroeconomic determinants of

remittances (Dakila and Claveria, 2007, Tuano-Amador, et al, 2007). The former finds

that in general, remittances are procyclical with respect to the exchange rate: exchange

rate depreciations lead to an increase in remittances. However, their finding on whether

the exchange rate is procyclical with respect to Philippine output is less convincing, as

most results are insignificant. TuañoAmador, et al showed evidence to suggest that

remittances have led to the recent appreciation of the peso in real terms.
 Such exchange rate index proves to be a significant predictor of the movement of

OFW remittances and more importantly, shows that OFs are induced by profit-driven

(particularly investment) rather than altruistic motives.

Interest Rate

Aydaş et al. (2004) argue that Turkish workers’ remittances increased with

interest rate differentials from 1979 to 1993. Using more recent data (1993‐ 2003) on

Turkey, Alper (2005) concludes that remittances are positively affected by the interest

and currency rates on the long‐term and negatively affected on the short term. Low

interest rate in home country induces workers to send fewer remittances.

GDP

The idea that remittances work as compensation capital for poor economic

performance was supported by Chami et al. [28, p. 77] which found negative correlation

between the size of remittances and the home country’s GDP for the period 1970-1998.

The reason for the negative correlation between the size of remittances and GDP is due

to the moral hazard and asymmetric information. The receivers are assumed to have

the same income no matter if they work or not since remittances compensate for low

income. The receivers then maximize the utility by spending more time for leisure since

it becomes cheaper in an opportunity cost perspective.

Chami, Fullenkamp and Jahjah developed a model which examines the

relationship between remittances and per capita GDP growth using standard population

averaged cross-section estimation (Chami, Fullenkamp and Jahjah [27]). In 2005, they

have developed the model and concluded that the remittances tend to be negatively
correlated with GDP growth, suggesting that they are compensatory in nature (Chami,

Fullenkamp and Jahjah [28]).